The Gilmo Report

September 6, 2017

September 6, 2017

Another NoKo surprise hit the markets yesterday after the rogue dictatorship went and tested an alleged hydrogen bomb, sending futures down slightly over the long weekend. That led to a sharp sell-off yesterday, but one that is consistent with the pattern of breaks off the peak when the market rallies up near or to new highs.

The NASDAQ Composite Index was smacked all the way back down to its 10-day moving average yesterday on heavy volume. By the close, however, it took back about half of those gains and ended the day with a final print that was just about mid-range. This can therefore be viewed as supporting action even though the index did in fact post another distribution day.

Today the NASDAQ started things out with an upside gap that failed to take back all of yesterday’s gains but held above near-term support along the 10-dma. Volume was lighter. For the most part the action remains choppy.

 

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The S&P 500 Index acted much like the NASDAQ on Tuesday as it closed nearly mid-range and held support above its 50-day moving average and the higher 20-day exponential moving average. This morning the index gapped up with the rest of the market and ended up churning around on lighter volume as it held above near-term support along the 50-dma and 20-dema.

 

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I still consider this a swing-trader’s market, which more accurately might be termed a tactical market where one flips back and forth based on the actual set-ups in real-time. Looking at the index charts, you can see that the market is just stuck within a large chop zone extending back to early June.

Within this context, a tactical approach becomes very feasible, and helps alleviate the stress of potential overnight news-hits that the market might have to take from time to time. Furthermore, with such an approach, one is not expecting to score big on some new big-winning stock that falls right out of the pages of How to Make Money in Stocks, Bill O’Neil’s seminal book on stock investing. Instead, the idea is to hit lots of singles and doubles while keeping risk to a minimum.

The idea that we are somehow in a rally and on the cusp of a glorious new bull market seems a bit premature, at best. The breakdown in leadership is one issue, while the news flow surrounding NoKo, the debt-ceiling, hurricanes, tax legislation, etc. plants a firm seed of event-risk in the market’s flower pot. Some stocks act okay, but overall it is a mixed bag.

But there are some strong trends to be found, such as that seen in gold since early July. The yellow metal benefited from the NoKo surprise over the weekend, and currently shows no signs of letting up after breaking out to a four-month high last week.  The SPDR Gold Shares ETF (GLD) blasted out of its prior four-month price range last week. Only pullbacks to the top of the prior four-month base at around 123 would put it back into lower-risk buy range.

I would also point out that silver, not shown here on a chart, has also been steadily trending higher since bottoming in early July. Its trend has more or less tracked that of gold and the GLD. For those looking for the chart on their own, the relevant ETF for silver is the iShares Silver Trust (SLV).

 

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I surmised over the weekend that both the Financial Select Sector SPDR Fund (XLF) and its second-largest component, J.P. Morgan (JPM), looked shortable as they stalled and churned around their 50-day moving averages. That turned out to be somewhat prophetic as both broke to the downside yesterday, with JPM, which I show on a chart below, getting tagged for a -2.39 loss yesterday.

This move took it below its prior 90.16 low of August 21st, setting up a logical undercut & rally reaction move. That’s what we saw this morning when JPM pushed above that low and got as high as 90.52 before stalling to close mid-range at 90.11. This still looks like a short, but getting in at or nearer to the 50-dma is preferable. Meanwhile, the XLF, not shown, looks just as weak, if not weaker. Today the ETF was unable to hold an attempt at a similar undercut & rally move (U&R) as it closed below its lowest August low after rallying above it earlier in the day.

 

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Netflix (NFLX) has been moving up nicely since posting a pocket pivot last week as it popped off its 10-dma and up through its 20-dema. After briefly testing the 20-dema yesterday, where it did enter into a lower-risk buy position near the line, NFLX today posted a pocket pivot signature as it pushed to new highs. This can be seen as a pocket pivot, in my view, since the stock started its move today about 1% above the 20-dema, which is close enough. The bottom line is that the stock is moving higher, and the last lower-risk entry point was at the 20-dema yesterday.

Today’s move was helped along by news that T Mobile (TMUS) will offer family plans that come with NFLX service at no extra charge. I’m wondering, however, what kind of data charges one will incur streaming video on their smart phone, but that’s for someone else to worry about, I suppose.

 

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When the market weakens, it’s not uncommon to see stocks that looked to be in lower-risk buyable positions begin to fail at those positions. This is why they are called lower-risk, because risk is only lower, not non-existent! For example, Tesla (TSLA) was in an arguably lower-risk entry position along its 20-dema, where it closed yesterday on light volume.

But today that support along the 20-dema that was evident yesterday failed to hold, and TSLA slid back down to its 50-day moving average. Volume picked up slightly but was still 44% below average. This puts TSLA on the cusp of being in a lower-risk entry position here using the 50-dma as a tight selling guide or becoming a short-sale target today if it busts the 50-dma.

Of course, the first assessment is the actionable one, unless we see TSLA gap below the 50-dma tomorrow morning, which is always a possibility in this market. But for now, it can be considered buyable along the 50-dma while using the line as a tight selling guide which keeps risk to a bare minimum.

I erred in my weekend report when I wrote that TSLA had experienced a 75% increase in short interest over the prior reporting period. The source I used, MarketSmith, showed a 75% increase in short interest, but other sources, which I should have checked, show that short interest has remained roughly the same over the past few weeks as the stock has swung around its 50-dma.

 

GR090617-TSLA

 

Nvidia (NVDA) was last buyable along its 10-dma and 20-dema last week and it has now round-tripped back to this moving average confluence. Another reason to buy it when it’s quiet at the 10-dma/20-dema confluence and then sell into the move back up toward the highs above 170. Now it’s back in a lower-risk buyable position here using the 20-dema or yesterday’s intraday low at 163.56 as a tight selling guide. One could also use the 50-dma down at 161.66 as a much looser selling guide, depending on one’s risk-preferences. Add salt to taste.

The flip side of this is that NVDA has taken a lot of selling heat over the past couple of months or so, and is still vulnerable to a late-stage base-failure. The trigger in this case would be a clean breach of the 20-dema, which would bring the stock back into play as a short-sale target. This will likely depend on the direction of the general market from here, so market context will be important.

 

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Facebook (FB) is acting well after posting an undercut & rally (U&R) move coming up through the 10-dma and 20-dema confluence last week, as I discussed in my Wednesday mid-week report of exactly one week ago. The stock then moved back up to the highs of its five-week base, where it ran into resistance yesterday.

It then backed down to the 10-dma/20-dema confluence and found support there today on a five-day pocket pivot. Volume came in below average, and I would like to see more five-day pocket pivots along the moving average confluence in lieu of a single ten-day pocket pivot. Nevertheless, the pullback this morning to the 10-dma and 20-dema offered a lower-risk entry opportunity for those bold enough to take it.

At the very least, that offered a decent intraday swing trade, and now we’re back near the highs of the base. Another test of the 10-dma/20-dema confluence is not out of the question if the stock spends more time working on this base, so should be watched for.

 

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Below are my notes on other big-stock NASDAQ names on my current long watch list:

Apple (AAPL) found support along its 20-dema today which would have served as a lower-risk entry point.

Alphabet (GOOGL) quickly gave up on last Thursday’s pocket pivot at the 50-day moving average and broke back below the line yesterday on increased selling volume. Today it tried to stabilize along the lower confluence of its 10-dma and 20-dema on light volume, but for the most part remains in bearish no-man’s land.

Amazon.com (AMZN) has pulled into its 10-dma on light volume after running into resistance near the higher 50-dma last week. This could put the stock in a lower-risk entry position with the idea that it should hold the 10-dma in hopes of a move back up toward the 50-dma, but that will likely depend on where the general market goes from here.

Microsoft (MSFT) continues to flounder after failing on last Thursday’s strong-volume breakout. It is now sitting at the 10-dma, just above the 20-dema, which could present a lower-risk entry point. However, a breach of the 20-dema would be a bearish development.

I must admit that if this market is not going to roll over and instead has a mind to go higher, I would tend to prefer going long groups that have been mostly dormant, such as the bio-techs.

Bio-techs have been taking a break after torrid upside moves last week. Vertex Pharmaceuticals (VRTX) is back in a lower-risk buy position as it pulls into its 10-dma here. This comes after last week’s pair of pocket pivots (say that ten times fast!) of the 10-dma and 20-dema confluence.

The stock can therefore be bought here while using the 10-dma or 20-dema as tight selling guides.

 

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Bio-tech names mentioned in the weekend report, Alexion Pharmaceuticals (ALXN) and Supernus Pharmaceuticals (SUPN), both not shown, are near-term extended and would be more buyable on constructive pullbacks into their 10-dmas at 140.32 and 45.30, respectively.

Bioverativ (BIVV), also not shown, hasn’t moved much this week as it remains locked between its 10-dma and 20-dema. I’d watch for a move back up through the 20-dema as a possible moving average undercut & rally (MAU&R) long set-up. One could also view the stock as buyable along the 10-dma right here while using it as a tight selling guide.

I like the tight action in Palo Alto Networks (PANW) following last Friday’s buyable gap-up move to higher highs. That BGU came after the company reported earnings Thursday after the close, and also constituted a breakout from a three-month price range.

The stock has since drifted in slightly in constructive fashion as it held tight today on lighter volume. Volume came in above average today, but reflects a sharp decline relative to last Friday’s BGU volume levels. That, in my view, is constructive. I like the stock here using the 142.23 intraday low of last Friday’s BGU as your selling guide.

 

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In the opticals space, the only name I think is worth trying to play here is another Ugly Duckling type of set-up, Lumentum Holdings (LITE). It’s formerly white-hot cousin, Applied Optoelectronics (AAOI), not shown, so far shows no signs of life here as it remains well below its 10-dma.

LITE, on the other hand, shows some semblance of attempted recovery as it pushed back above its 20-dema last week and held tight on a pocket pivot on Thursday. Yesterday it flashed another pocket pivot in the face of a big market sell-off, but today couldn’t retake its 50-dma on a market rally day.

Instead, the stock reversed to close back in the red, but is still holding near-term support at the 20-dema. I take a two-sided view here. If it can hold the 20-dema, it is playable as a long, using the 20-dema as a tight selling guide. A breach of the 20-dema would bring the stock back into play on the short side.

Finally, a third way to look at this is as an LSFB short-sale set-up in progress, with rallies up to the 50-dma shortable until and unless the stock can clear and hold above the 50-dma for good. That, for now, remains a big question, and so this can be viewed as a long or a short, depending on the real-time price/volume action going forward.

 

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The remaining China Three, which are probably more aptly titled as the Three Musketeers of China, are Alibaba (BABA), Weibo (WB), and Sina (SINA). Both SINA and WB, not shown here on charts, are extended to the upside and not in what I would consider to be a lower-risk entry position. SINA was last buyable per my comments last Wednesday when it was sitting at its 20-dema and the prior base breakout point just under $100.

As SINA and WB flex their muscles, Alibaba (BABA) may be starting to waver here as it tests the 20-dema on above-average selling volume today. The stock did hold above the line, but closed in the lower part of its daily trading range. This may indicate that the stock needs more time to build a new base after a strong run-up so far in 2017. For now, if I were long the stock I’d use the 20-dema as my selling/profit-taking guide, although one could also employ the 50-dma as a wider selling guide.

 

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I continue to watch closely the action in two wolf packs that have been discussed in recent reports. I view both the cloud and video-gaming leaders as lynchpin clue types of stocks given their positions in potentially later-stage bases. These bases could result in clean breakouts that send the stock higher in playable uptrends. But in two-side fashion, I remain very aware and attuned to the fact that breakout failures in these on a group basis will likely have broader implications for the market.

Wolf pack failures by the clouds or video-gamers would also provide some reasonable short-sale targets for those oriented to such manic activities. In the old days, breakdowns in groups are usually useful clues. The optical names like AAOI, LITE, FN and others have provided a recent example of this phenomenon, so it appears to have some validity, even in the current market.

Consistent with my discussions in recent reports, we can look at some of these names to understand how they might play out, and how maintaining an objective, two-sided view is useful in these cases given the current general market action.

At this time, the clouds still look quite positive. Workday (WDAY) retested its prior breakout point of last week and the 10-day moving average today where it found support and closed up on the day. It remains within buyable range of last week’s standard-issue base breakout.

 

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WDAY’s cousin, ServiceNow (NOW) is holding up well following last Thursday’s pocket pivot base breakout, but I consider it slightly extended here. Pullbacks to the 10-dma at 112.73 would be your first reference for lower-risk entry opportunities.

Meanwhile, the big-stock cloud cousin to both NOW and WDAY, Salesforce.com (CRM) continues to post all-time highs and is currently extended. I would prefer more opportunistic pullbacks into the 20-dema at 93.37 as the best, lower-risk entries.

While the cloud wolf pack continues to show strength, the video-gaming wolf pack is less constructive. Both Activision Blizzard (ATVI) and Electronics Arts (EA) are showing wolf pack tendencies as they appear to be moving in sync. Both stocks posted base breakouts last Wednesday, and both breakouts are starting to show signs of initial failures.

ATVI broke out in fine style last week on heavy buying volume. But that was a breakout to nowhere as it has now dipped back into its 10-dma. Selling volume was drying up as of yesterday, but today picked up slightly as the stock closed down. This pullback is either a lower-risk entry point using the 20-dema as a tight selling guide, or the start of late-stage base-failure. A base failure would be initially confirmed by a clean breach of the 20-dema, so play this one as it lies, and be prepared to move in either direction depending on how it plays out.

 

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Electronic Arts (EA) broke out on Wednesday on a pocket pivot volume signature that was below average, which makes its breakout different from ATVI’s breakout on the same day. However, the ensuing results and lack of upside follow-through to these breakouts has been lackluster for both stocks. EA is now the weaker of the two as it has now closed below the 20-dema, bringing it into play as a short-sale target while using the 20-dema as a guide for an upside stop. If ATVI also broke down below its 20-dema, this would confirm this as a wolf pack short theme.

 

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Meanwhile, ATVI’s and EA’s video-gaming cousin, Take-Two Interactive (TTWO), not shown, has been acting much more strongly as it has continued to trend higher along its 10-dma. However, it closed below the 10-dma today for the first time since early August, which may bring a test of the 20-dema into play. The video-gaming wolf pack is certainly one to watch for as a possible group failure, especially if we start to see TTWO get into trouble as well.

We might also consider these AAPL suppliers, Broadcom (AVGO) and Skyworks Solutions (SWKS), as two-side situations that should be monitored for success or failure. AVGO is currently sitting right at its 50-day moving average with volume declining to -43% below-average today. This would put the stock in a buyable position using the 50-dmas as a tight selling guide. A breach of the 50-dma could bring the stock into play as a short-sale target, however, so play this as it lies.

 

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Skyworks Solutions (SWKS) had a more robust move last week after pulling a nice undercut & rally (U&R) move last Tuesday on the big market shakeout. It has since rallied up to the highs of what can best be described as the handle area of a ladle-with-handle sort of base formation.

From here, a low-volume pullback to the 10-dma/20-dema moving average confluence might present a lower-risk entry position. SWKS did run into resistance near the handle highs yesterday, but is holding up well. This is another two-side situation that will likely play out in sync with where the market goes from here.

 

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Herewith my notes on other stocks discussed in recent reports:

Alteryx (AYX) has been removed from my buy watch list.

Appian (APPN) posted a pocket pivot off its 10-dma yesterday, but it’s not like one would have been looking to step into the stock at the 10-dma given yesterday’s steep market sell-off. And, as if to mock anyone who didn’t have the cojones to pull the trigger yesterday when the stock was at the 10-dma (like yours truly), the stock just kept pushing to newer highs today.

First Solar (FSLR) remains within a five-week-plus base now as volume dries up sharply. An opportunistic approach here would be to look for a pullback to the 50-dma at 45.37 which would coincide with an undercut of the lows of the current five-week base. Otherwise, if you buy it here you would use the 50-dma as your maximum selling guide.

GrubHub (GRUB) is holding tight after posting a pocket pivot off the 10-dma a week ago. For now, it looks like pullbacks to the 10-dma would offer your best lower-risk entries.

SolarEdge Technologies (SEDG) dipped below its 20-dema today on above-average selling volume, which is not what you want to see. I would lay back here and see how things develop in the coming days.

Yelp (YELP) posted a higher closing high on Friday as it tracks along its slightly rising 10-dma. Ideally, I’d prefer to look for a more opportunistic entry on any kind of pullback closer to the 20-dema, without chasing the stock at this point.

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line).

This market brings to mind the old “Frog market” joke that we used to use when I worked at O’Neil + Co. way back when. During the latter part of the 90’s we had one environment where the market chopped around like it is today. We therefore referred to it as a frog market rather than a bull or bear market simply because it mostly hopped around like a frog with no consistent, playable trend. This market has the same feel.

Over the weekend, I cited the current sentiment numbers from the American Association of Individual Investors, which appeared to show that most individual investors, while not bullish, are mostly “not bullish.” This morning I saw some data from my broker, TD Ameritrade, showing that bullish sentiment among retail investors is at the highest levels in many years.

 

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This incongruity can make sense however, since the AAII survey is based on what individual investors say while the TD Ameritrade Investor Movement Index is based on what individual investors actually do. Whether any of this has any predictive value regarding the market’s short-term direction, however, remains to be seen.

Meanwhile, it still appears that it all boils down to what the individual stocks area doing. For that reason, I would continue to act on the basis of the individual stock set-ups you see in real-time, long or short, while seeking to keep risk to a bare minimum.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held no positions though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2017 Gil Morales & Company, LLC. All rights reserved.